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Monday, April 16, 2012

Second Look: Canadian Homeowners’ Sensitivity to Interest Rates

Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research.

“I'm proud of the Canadian system and its stricter policies for obtaining a mortgage that has pretty much dampened any housing bubbles that we might have.”

I’m not so sure about this any more. I don’t think we’re headed for a mortgage crisis anywhere close to as bad as what happened in the U.S. a few years ago, but it seems clear now that many Canadians would be in for trouble if interest rates rose by even as little as 2%.

On a $300,000 mortgage amortized over 30 years, 3% interest gives monthly payments of about $1260, but 5% interest leads to $1600 payments. This could easily push some homeowners who are right on the edge into default (or at least force them to sell their homes).

I’m not making any predictions about the extent of the pain we’ll see throughout the economy when interest rates start to rise again, but it won’t be fun for those who are heavily indebted.

With interest rates being so low, don't you think the government will only raise them a small amount to slow the economy if it ever gets going. I mean a 1 percentage point increase on 3% is quite substantial.

Interesting article on cbc.ca on "subprime" mortgages in Canada. No, it's not the same subprime that sank the US housing market, but it's growing in Canada. I still don't think we can explode here so soon after the US explosion. Too many people still remember how things went bad so quickly that that's probably why we'll avoid it. Here is the link: http://www.cbc.ca/news/business/story/2012/04/16/subprime-mortgage-market.html